Defense contractors are speaking up increasingly loudly against the possibility of mandatory federal budget reductions starting in January, warning that the cuts would take a toll on their businesses.
Robert J. Stevens, chairman and chief executive at Bethesda-based Lockheed Martin, the world’s largest defense contractor, said last week that the company might be forced to notify all its employees of the possibility of job losses as early as September or October in advance of the reductions.
The cuts, part of a process known as sequestration, were put in place last year during debate over the debt ceiling. The process mandates a roughly $1 trillion reduction in federal spending from fiscal 2013 to 2021. Sequestration requires the cuts to be split between defense spending and all non-defense accounts.
Although the reductions could be stopped by Congress, contractors and industry advocates have said they don’t expect any adjustments before the presidential election. But that doesn’t mean they won’t be forced to take action as the campaign winds down.
Stevens said last week that under existing law, Lockheed must give employees 60 to 90 days notice — depending on the state — of an event that might cause significant job losses or facility closures.
“It is quite possible that we will need to notify employees in the September and October time frame that they may or may not have a job in January, depending upon whether sequestration does or does not take effect,” he said. “Because the level of planning detail really isn’t available, we may have to notify every one of our employees and all of our suppliers and subcontractors.”
If sequestration happens, Stevens said he expects across-the-board reductions that would “start this huge, cascading effect and bow wave of contract actions.”
Wes Bush, chairman, chief executive and president of Falls Church-based Northrop Grumman, said his company, too, is trying to prepare for the possibility of sequestration, which could cause turmoil.
“We know how to do this; we know how to do it in a rational way,” Bush said of implementing cuts, noting that Northrop has reduced its employee head count by 11 percent over the past four years. “If faced with a cliff where the next day you’ve got to take X percent out . . . it will not be pretty.”
The Aerospace Industries Association, which represents a large number of defense contractors, has been actively campaigning against sequestration.
“The broader contracting community understands that there will be waves of repercussions from what the big [prime contractors] have to do,” said Marion Blakey, president and chief executive of the group. “That, frankly, is even harder for the small guys. . . . The small companies don’t have the kind of cushion, don’t have the kind of resilience that you see at the top end of the industry.”
Even if sequestration were reversed or delayed, some of the preparations industry might have to undertake would not be easily reversed, Blakey and Stevens said.
“For us, the consequences of sequestration are real, and they are nearer-term than some discussions that are underway today . . . suggest,” said Stevens. “We’re raising a full-throated voice simply trying to describe some of these mechanics.”
By Marjorie Censer
June 2, 2012